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Summer 2003 cover

National Observer Home > No. 55 - Summer 2003 > Articles

Can Australian Industry Support Defence in a Regional Crisis?

Michael O'Connor

By their very nature, defence planning and, in this context, the capabilities of manufacturing industry are not elements of national infrastructure that can - or should - be designed to meet some passing event like a regional security crisis. This must be understood in the context of some of the radical strategic changes that have occurred, especially in the post-Cold War world.

The first is the massive compression of time and space caused by the communications revolution. This means not only that warning times of conflict are reduced but, paradoxically, that the capacity for intervention from a distance is increased.

Coupled with this is the reality that, in cases of unprovoked aggression or of conflict in any important region, external intervention, especially by the United States or allied nations, is probable. Moreover, even the threat of such intervention is often likely to deter aggression.

The United States is by far the most powerful nation in the world, economically and militarily. There is simply no rival in prospect for at least a generation. Furthermore, the United States no longer enjoys the luxury - if it ever did - of disengaging with the wider world and retreating into isolationism.

The Impact on Defence

Some would argue - and perhaps Australian governments of both political parties would agree - that the consequences for Australia are that this country need not invest in any realistic defence force. The rationalisation is that Australia itself is not threatened, that our alliance with the United States guarantees our security and that the only defence force we need is one that can make token contributions to American-led coalition operations.

That this somewhat cynical view may have a basis in reality is supported by the sustained disinvestment in defence pursued by the Hawke, Keating and Howard governments since 1987. From a commitment of 2.7 per cent of G.D.P. and 9.0 per cent of total Federal outlays in 1986/87, we have steadily reduced commitments to 1.8 per cent of G.D.P. and 7.3 per cent of Federal outlays in 2001/02. Personnel numbers have been cut over the past decade by 28 per cent.

Coincidentally, the Defence Force is now operating at a higher and ultimately unsustainable tempo than at any time since World War II.

Industry Support for Defence

In regard to industry support for defence, there are a number of conceptual and strategic factors that affect the equation.

Conceptually, we can make a choice between:

• self-sufficiency;

• self-reliance; or

• dependence.

Self-sufficiency means producing all that the Defence Force needs from our own resources and domestic industry. It is the most expensive option and is not achievable if the Defence Force is to have adequate equipment.

For example, there is only one country in the world that can build advanced combat aircraft. That, of course, is the United States. Russia can no longer do so; indeed, it probably never could. The Europeans try hard but can only achieve what they do achieve through consortium arrangements of two or three countries. Even then, their products fall well short in performance compared with those produced in the United States. For example, they are unable to build a stealth aircraft, and their products are also very expensive.

Even in the United States, falling investments in defence post-Cold War have forced a consolidation of the aircraft industry into just two major manufacturers.

Let me dispose of dependence quickly. Depending upon outside suppliers for all of our equipment and munitions means total vulnerability. In the mid-1960s, the United States advised the South Vietnamese government to abandon plans for a small arms and ammunition manufacturing capability on the ground that the United States would always provide whatever was needed. For political reasons, they did not do so from 1973 onwards in what was one of the great betrayals of history, so that the South Vietnamese government, which was getting on top of the assault from the north in the early 1970s, found itself bereft of the means to fight, and this had a catastrophic impact on its army's will to fight.

That leaves self-reliance, a term which has as many meanings as one wishes to give it. Essentially, though, what it means in practice is that Australia will import sophisticated and advanced equipment such as aircraft, missiles, radars and other sensors. Australia will provide from our own resources the capacity to maintain, modernise, and improve that equipment, and to manufacture high usage consumption items such as spare parts, ammunition and other items such as clothing, fuel and food.

As is readily perceived, there are risks in that policy, risks that derive from a possibility that a conflict that we do engage in will last longer than expected and that losses of advanced equipment will be greater than our capacity to import. This involves an exercise in risk management, and the judgements made will be both rational and irrational, especially where political considerations apply.

Defence Industry in Context

Here one must consider where Australia is at present, some of the constraints that apply, and some of the good things that are being done.

Defence currently involves spending around $7 billion annually on goods and services. About $5.5 billion is spent in Australia.

A considerable proportion of that amount is spent on services such as hotel services at military bases and on information technology. It is difficult to estimate this proportion from the sources that are readily available, but it is probably of the order of $500 million. Thus, about $5 billion is spent annually on manufactured product by Australian contractors. That represents between 2.0 and 2.5 per cent of manufacturing output in Australia.

But even that figure is misleading because a large proportion of the money spent goes to overseas suppliers of components such as radar and sonar systems, gun mounts and guns, fire control systems and the like.

Furthermore, many of the products such as ships, armoured vehicles and helicopters which are built under licence in Australia, include a substantial intellectual property component to foreign owners of the design.

What does Australia produce? The range of products is quite impressive, but too long to list here. Generally, they are at the low technology end of the spectrum and are heavily slanted towards consumables. They include processed food, specialised clothing, all ammunition up to and including 155mm calibre, explosives, specialised fuels and lubricants.

Capital items include warships up to about 6,000 tonnes, some support ships and minor war vessels, light water craft, helicopters and light armoured vehicles. Some of the latter are Australian-designed while others are built here under licence.

Australian-designed modifications and improvements are made by Australian industry and many of these are quite substantial, not only in terms of expenditure, but also in the design effort. However, possibly the greater part of this expenditure is based upon software development where Australian skills are very high.

An important element of capability lies in the ability to operate and maintain what Australia has. Many countries in the world can deploy advanced military equipment, but lack the capacity to operate it effectively or to maintain it. Australia's limited defence capability does at least include both of these vital elements.

Who's Who in Defence Industry

The top five defence contractors in Australia accounted for something over $2.2 billion in turnover in 2001. Of the five, only one, Tenix Defence Systems, is a wholly owned Australian company. The others, A.D.I. Limited, B.A.E. Systems Australia, Raytheon Australia and Boeing Australia, are all subsidiaries of overseas corporations. All five are primarily manufacturers, but do include quite strong service components.

The Limits on Defence Manufacturing

There are four basic limits, all of them inter-related, that apply to manufacturing for defence in Australia. These are:

• orders;

• investment;

• technology; and

• export limits.

An additional issue is that of the business relationship between government and industry.

Industry cannot be expected to invest in manufacturing capability for defence unless sustained orders are forthcoming from government, which is effectively the only customer. In this context, the sustainment factor is crucial. Companies cannot be expected to outlay the necessary substantial investment in equipment and people, especially highly skilled people, unless they have reasonable assurance of continuity of work. A classic example of this constraint lies in the submarine construction programme launched in the late 1980s. This ambitious programme saw the establishment of the Australian Submarine Corporation with majority government ownership to build six advanced non-nuclear submarines. While the outcome, despite all the controversy, has been very successful, the company now has no work except maintenance for the next 20-30 years, and the government wishes to sell its interest to anyone foolish enough to buy.

The same problem applies to Tenix's frigate-building program, A.D.I.'s minesweeper project and the new helicopter programmes. Although the shipbuilding companies have a reasonable prospect of winning new orders, the uncertainty and the hiatus between wind-down of an existing programme and the gearing up for the new means a loss of income and of skilled people.

Essentially, defence policy lacks the coherence and continuity necessary to keep specialised companies earning income. This a lesser problem for those companies operating in the service sector or in, say, food processing where their non-military market is their major income earner, but it is a serious problem for the warship or armoured vehicle builder, for example.

This lack of continuity - which is however eminently possible to achieve - leads to a lack of investment and, in the case of overseas-owned companies, to at least a close examination of the question whether to continue to operate in Australia.

Any manufacturing company must be prepared to invest heavily in new technology or go out of business. New machines, new materials and new skills are the core elements of competitive manufacturing. But investment for these purposes demands entrepreneurial attitudes and the stimulus generated by continuing orders that have been lacking in defence industry and in government.

Australia's defence market will always be small and economies of scale will not be generated without exports of product. However, the political climate is deeply hostile to defence exports so that, even when governments make a public gesture of support, that support dissolves in the face of bureaucratic and political hostility to any product which smacks even indirectly of lethality.

Australian manufacturing has long had either an uncomfortable or too comfortable relationship with government as its customer. Until very recently, many defence companies were government owned and managed while other defence companies manufacturing military hardware learned to demand that government underwrite their investment even in such basic tasks as lodging tenders.

Further, successful tenderers had to run the gauntlet of a departmental oversight that was extremely intrusive, alarmingly costly and fundamentally incompetent. There are so many horror stories that to relate them would be extremely lengthy. The upshot of this is that many companies deliberately decline to tender for defence work.

Conclusion

The basic question posed is: Can Australian industry support defence in a regional crisis?

In such a crisis, most of the increased consumption of items like small arms, ammunition and other consumables could be met by increasing production because most of the specialised plants are operating well below capacity. Furthermore, in an emergency, the mobilisation of other parts of our manufacturing industry would be possible in fairly quick time, albeit at increased cost.

The most difficult area would be in high technology consumables such as missiles and specialised ammunition types that are not manufactured in Australia. With reasonable warning - which is unlikely in the modern world - we could develop some capabilities, but would remain dependent either on war stocks (which are probably underestimated) or imports.

Neither obstacle is, however, insuperable. Australia could expect that a regional crisis would be limited in intensity and time, or it would rapidly involve the United States as our ally so that the problem of imports would probably not be crippling.

That is, however, a matter for judgment, and of risk management. Australia can have absolute security, but at a cost which no Australian community will pay.


National Observer No. 55 - Summer 2003